ECB Hikes 25 Bps to 2.5% as Eurozone Inflation Hits 3.3% — SkimNews
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- The European Central Bank raised its key deposit rate by 25 basis points to 2.5% from 2.25%, with markets having priced in a 100% chance of the move ahead of the meeting.
- Eurozone inflation hit 3.3% in August with energy inflation surging to 14.3%, driven by the bloc's status as a net energy importer facing disrupted commodity transit through the Strait of Hormuz.
- The ECB's Governing Council projected baseline inflation (excluding energy and food) of 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028, citing a 'highly uncertain' outlook with 'risks to the upside for inflation and to the downside for economic growth.'
- A Deutsche Bank client survey found no consensus on the hiking cycle's endpoint: one-third expect a 2.75% peak, one-quarter see the cycle ending at 2.5%, and another quarter forecast a 3% terminal rate.
- European bond yields hit multi-decade highs in recent weeks as Middle East conflict intensified, with investors pricing in higher inflation and additional rate hikes.
- Investment strategists at Aviva Investors, JP Morgan Private Bank, and Aberdeen all expect more hikes, with JP Morgan's Patrick Ernst stating 'one hike is not a ceiling,' while Aviva's Ed Hutchings cautioned that 'things may well have gone too far.'
Why it matters: The ECB became the first major central bank to hike in response to the US-Iran war back in June, and now bears the burden of leading the policy response with eurozone inflation at 3.3% and energy inflation at 14.3%. With European bond yields already at multi-decade highs and no investor consensus on the terminal rate, the ECB's next moves will set the tone for borrowing costs across the continent.
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